by Calculated Risk on 7/29/2009 09:07:00 PM

Think Corus and Guaranty (Texas) ...

From the WSJ: FDIC Poised to Split Banks to Lure Buyers (ht jb)

The Federal Deposit Insurance Corp. ... is poised to start breaking failed financial institutions into good and bad pieces in an effort to drum up more interest from prospective buyers.

The strategy ... is aimed at selling the most distressed hunks of failed banks to private-equity firms and other types of investors who may be more willing than traditional banks to take a flier on bad assets. The traditional banks could then bid on the deposits, branches and other bits of the failed institution that are appealing.

"We want banks to participate in the resolution process, but we know it's a tough time for banks to participate in the resolution process," said Joseph Jiampietro, a senior adviser to FDIC Chairman Sheila Bair. ... "There are certain situations when assets are so distressed and make up a significant percentage of the balance sheet that strategic buyers are hesitant to participate in the process," said Mr. Jiampietro.

The article quotes Jiampietro as saying the process is "pretty far along" and that a transaction could happen soon. As I said, think Corus and Guaranty Financial. Both will probably be seized as soon as bidders can be found.

This suggests an RTC type entity might also be formed. Interesting times.

by Calculated Risk on 7/29/2009 06:34:00 PM

Three stories from DataQuick:

June Seattle MSA Home Sales and Median Prices

Last month 16.9 percent of all resales were houses or condos that had been foreclosed on in the prior 12 months, down from 19.2 percent in May and a peak of 23.9 percent in January this year.

However, there are more foreclosure resales on the way, and they will continue to weigh on home prices for the foreseeable future. In June, lender repossessions spiked: Nearly 863 houses and condos were lost to foreclosure in the three-county Seattle region, up nearly 37 percent from May and up 119 percent from a year ago. It was the highest monthly total since foreclosures began to surge in 2006. The figures are based on the number of trustees deeds filed with the county recorder's office.
emphasis added

Phoenix June Home Sales, Median Prices Up

In June, 60.8 percent of the Phoenix-area houses and condos that resold had been foreclosed on in the prior 12 months, down from 64 percent in May and the lowest since such foreclosure resales were 58.6 percent of all resales last November. Foreclosure resales hit a high of 66.2 percent this March ...

Absentee buyers made up 39.6 percent of all purchases – a relatively high percentage in the West. ...

For the foreseeable future, the Phoenix region will continue to have many foreclosures to recycle, and that inventory of lender-owned property will weigh on home prices. In June, lender repossessions spiked: Nearly 5,800 houses and condos were lost to foreclosure in the two-county Phoenix region, up nearly 38 percent from May and up 40.8 percent from a year ago. It was the highest monthly total since foreclosures began to surge in 2006.

Las Vegas June home sales higher; median $ steady

About 70 percent of the Las Vegas-area houses and condos that resold in June were foreclosure resales, meaning those homes had been foreclosed on in the prior 12 months. That was up from 59 percent in June 2008 but the lowest for any month since it was 68.9 percent last December. Foreclosure resales peaked in April at 73.7 percent of total resales ...

Looking ahead, the Las Vegas region will still have many foreclosures to burn off, and that inventory of distressed property will weigh on home prices. In June, lender repossessions spiked: Nearly 3,600 houses and condos were lost to foreclosure in Clark County, up 54 percent from May and up 34 percent from a year ago. It was the second-highest monthly total, behind 3,718 this February, since foreclosures began to surge in 2006.

Las Vegas and Phoenix have far more foreclosure resales than Seattle, but all three cities are seeing a surge in foreclosures.

I spoke with a SoCal developer yesterday, and he said there are some positive signs in the California Inland Empire, but he is worried about another flood of REOs. Every bank he has spoken with (he does some consulting for banks on their real estate holdings) is sitting on a pile of REOs and homes in the foreclosure process.

It is unclear how big this surge will be, but here it comes.

by Calculated Risk on 7/29/2009 04:00:00 PM

First a graph from Effective Demand on Ventura County sales and inventory by price (Effective Demand covers Ventura and the San Fernando Valley in LA)

Click on graph for larger image in new window.

This graph from Ventura County Demand versus Inventory - July 2009

Most of the activity is at the low end, and inventory is pretty low. This is true for many of the low-to-mid end areas. There are more foreclosures coming, but the timing is uncertain - will it be a flood, or will the banks just bleed the foreclosures into the market?

But for the mid-to-high end - expect bad news! Not only is financing tight, but there is a dearth of move-up buyers.

And from Bloomberg: ‘Cram-Down’ May Be Revived Unless Lenders Modify More Mortgages

[House Financial Services Committee Chairman Barney] Frank said he will re-attach the cram-down provisions to any new legislation requested by the industry, “unless we see a significant increase in mortgage modifications and foreclosure- avoidance.”
...
Cram-downs let federal judges lengthen terms, cut interest rates and reduce mortgage balances of bankrupt homeowners, even if the lender objects.

Not much on Corus or Guaranty Bank (Texas), although both will probably be seized by the FDIC soon. Talk about seizing: Corus Bank seizes Aventine apartments

A company affiliated with Corus Bank seized the 216-unit Aventine at Boynton Beach apartment complex.

In a July 16 filing in Palm Beach County Circuit Court, Aventine Marketing released Boynton Pinehurst from the $25 million remaining on its mortgage with the Chicago-based bank in exchange for the deed to the property. ...

Boynton Pinehurst ... planned to convert Aventine into condos when it took a $37.2 million mortgage from Corus Bank in 2006. It paid $48 million for the property that year.

Looks like another property with the value cut in half - and more apartments back on the market (aka "reconversions"). And here is another condo project being converted to apartments: Novato's Millworks condos switch to rentals after only two of 124 units are bought (ht Rich and others)

Millworks, a 420,882-square-foot residential/commercial project at De Long and Reichert avenues, had a grand opening in May but has only sold two of 124 condominiums situated above a Whole Foods grocery store slated to open next spring.
...
Starting this week, the condos will be rented on sixth-month and one-year leases for about two years before Signature intends to crank up sales efforts again, Ghielmetti said.

The condo reconversions and new condos being rented is part of the reason there has been a surge in rental units in recent years, pushing the rental vacancy rate to record levels.

The last graph is from Doug Short of dshort.com (financial planner): "Four Bad Bears".

Note that the Great Depression crash is based on the DOW; the three others are for the S&P 500.

by Calculated Risk on 7/29/2009 02:00:00 PM

From the Fed: Beige Book

Reports from the 12 Federal Reserve Districts suggest that economic activity continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level.
...
Most Districts reported sluggish retail activity.
emphasis added

And on real estate:

Commercial real estate leasing markets were described as either "weak" or "slow" in all 12 Districts, although the severity of the downturn varied somewhat across Districts. While the office vacancy rate was up and rents were down in the Dallas District, market fundamentals there remained stronger than the national average. Market conditions in the New York District are significantly worse than one year ago, on average, but have been relatively stable in recent weeks and some parts of the District report improving fundamentals. Office vacancy rates continued to climb in the Atlanta, Boston, Kansas City, Minneapolis, Philadelphia, Richmond, and San Francisco Districts, as well as in Manhattan, resulting in sizable leasing concessions and/or declines in asking rents. ... Commercial real estate sales volume remained low, even "non-existent" in some Districts, reportedly due to a combination of tight credit and weak demand. Construction activity was limited and/or declining in most Districts, although exceptions were noted for health and institutional construction in the St. Louis District, public sector construction in the Chicago District, and the reconstruction of the World Trade Center in Manhattan. Tight credit was cited as an ongoing factor in the dearth of new construction activity. The commercial real estate outlook was mixed, both within and across Districts. Some contacts expect commercial real estate markets to improve within two quarters and others predict further market deterioration for the remainder of 2009 and possibly through late 2010.

Residential real estate markets in most Districts remained weak, but many reported signs of improvement. The Minneapolis and San Francisco Districts cited large increases in home sales compared with 2008 levels, and other Districts reported rising sales in some submarkets. Of the areas that continued to experience year--over--year sales declines, all except St Louis--where sales were down steeply-- also reported that the pace of decline was moderating. In general, the low end of the market, especially entry-level homes, continued to perform relatively well; contacts in the New York, Kansas City, and Dallas Districts attributed this relative strength, at least in part, to the first--time homebuyer tax credit. Condo sales were still far below year--before levels according to the Boston and New York reports. In general, home prices continued to decline in most markets, although a number of Districts saw possible signs of stabilization. The Boston, Atlanta, and Chicago Districts mentioned that the increasing number of foreclosure sales was exerting downward pressure on home prices. Residential construction reportedly remains quite slow, with the Chicago, Cleveland, and Kansas City Districts noting that financing is difficult.

It is the usual pattern for Commercial real estate (CRE) to follow residential off the cliff, but I'm surprised anyone thinks CRE will recovery in a couple of quarters. I think CRE will be crushed this year and next.

More beige shoots ...

by Calculated Risk on 7/29/2009 12:12:00 PM

From NY Fed President William Dudley: The Economic Outlook and the Fed's Balance Sheet: The Issue of "How" versus "When"

Dudley discussed his economic outlook, and how the Fed will exit from the current policy stance. Dudley doesn't think the Fed's policy stance will change any time soon.

Here are some excerpt on his economic outlook:

[T]he economic contraction appears to be waning and it seems likely that we will see moderate growth in the second half of the year. The economy should be boosted by three factors: 1) a modest recovery in housing activity and motor vehicle sales; 2) the impact of the fiscal stimulus on domestic demand; and 3) a sharp swing in the pace of inventory investment. In fact, if the inventory swing were concentrated in a particular quarter, we could see fairly rapid growth for a brief period.

Regardless of the precise timing, there are a number of factors which suggest that the pace of recovery will be considerably slower than usual. In particular, I expect that consumption—which accounts for about 70 percent of gross domestic product—is likely to grow slowly for three reasons. First, real income growth will probably be weak by historical standards. There were a number of special factors that boosted real income in the first half of the year, helping to offset a sharp drop in hours worked and very sluggish hourly wage gains. These factors included the sharp drop in gasoline and natural gas prices; the large cost-of-living-allowance increase for Social Security recipients reflecting last year’s high headline inflation; a sharp drop in final tax settlements; a reduction in withholding tax rates; and a one-time payment to Social Security recipients. These factors provided a transitory boost to real incomes, which will be absent during the second half of the year. As a result, real disposable income is likely to decline modestly over this period.

Second, households are still adjusting to the sharp drop in net worth caused by the persistent decline in home prices and last year’s fall in equity prices. This suggests that the desired saving rate will not decline sharply. That means consumer spending is unlikely to rise much faster than income. In other words, weak income growth will be an effective constraint on the pace of consumer spending.

Moreover, some sectors such as business fixed investment in structures are likely to continue to weaken as existing projects are completed. In an environment in which vacancy rates are high and climbing, prices are falling, and credit for new projects is virtually nonexistent, this sector is likely to be a significant drag on the economy over the next year.

Perhaps most important, the normal cyclical dynamic in which housing, consumer durable goods purchases and investment spending rebound in response to monetary easing is unlikely to be as powerful in this episode as during a typical economic recovery. The financial system is still in the middle of a prolonged adjustment process. Banks and other financial institutions are working their way through large credit losses and the securitization markets are recovering only slowly. This means that credit availability will be constrained for some time to come and this will serve to limit the pace of recovery.

If the recovery does, in fact, turn out to be lackluster, the unemployment rate is likely to remain elevated and capacity utilization rates unusually low for some time to come. This suggests that inflation will be quiescent. For all these reasons, concern about “when” the Fed will exit from its current accommodative monetary policy stance is, in my view, very premature.
emphasis added

The rest of the speech is on the "how" of unwinding current policy and is worth reading.

Note: Usually the NY Fed president is one of the most powerful Fed voices and has a permanent seat on the FOMC (the other Fed presidents serve on a rotating basis).

by Calculated Risk on 7/29/2009 10:33:00 AM

What if I wrote that U.S. payroll employment increased by 383 thousand jobs in May 2009 following an increase of 259 thousand jobs in April 2009?

Some readers would suspect CR had been captured by aliens or had visited crazytown.

But, in fact, those numbers are exactly what the BLS reported as the actual change in payroll employment in April and May. The economy added 643 thousand jobs over those two months. However no one reports those numbers because there is a strong seasonal pattern to employment.

Even in the best of years, 2.5 to 3.0 million people lose their jobs in January. It happens every year for a number of reasons such as retail cutting back on holiday hires. And just about every July the economy loses over 1 million jobs for seasonal reasons too.

The following graph shows this seasonal pattern:

Click on graph for larger image in new window.

The blue line is the seasonally adjusted (SA) change in net jobs as reported by the BLS, and the red columns are the actual not seasonally adjusted (NSA) data.

No one reports the NSA data because the swings are so wild and the pattern very consistent. Unless you follow the data closely, the NSA numbers are meaningless.

The model used by the BLS for seasonal adjustments is very good, and the SA number is the one to use.

For new home sales there is a strong seasonal pattern too, but in this case I think it is helpful to look at both the NSA and SA data.

Here is how I present monthly new home sales (NSA - Not Seasonally Adjusted).

This shows the seasonal pattern (Spring buying season), and it is easy to compare the pattern for the current year to the previous years.

Of course, for new home sales, I lead with the headline SA data.

And that brings us to the Case-Shiller data.

Yesterday I posted the following graph of the month-to-month change of the Case-Shiller index for both the NSA and SA data (annualized). Note that Case-Shiller uses a three-month moving average to smooth the data.

The Blue line is the NSA data and there is a clear seasonal pattern for house prices.

The red dashed line is the SA data as provided by Case-Shiller.

For this pattern, I'd expect the SA dashed line to run between the peaks and troughs as it did in the '90s.

However look at the last couple of years. The SA dashed line is very close to the NSA line, even with the wild NSA swings. This suggests to me that the seasonal adjustment is currently insufficient and I expect that the index will show steeper declines, especially starting in October and November.

Even with the wild NSA swings, most media reports used the NSA data and not the SA data (Streitfeld at the NY Times used both).

by Calculated Risk on 7/29/2009 09:06:00 AM

From David Streitfeld at the NY Times: Recovery Signs in Housing Market Stir Some Hope

After a plunge lasting three years, houses have finally become cheap enough to lure buyers. That, in turn, is stabilizing prices, generating hope that the real estate market is beginning to recover.

From Peter Hong at the LA Times: Home prices may be stabilizing, market tracker shows

Another sign emerged that the nation's struggling housing market may be nearing its bottom as a widely followed national home-price index posted its first gain in nearly three years.

The S&P/Case-Shiller index of home prices in 20 metropolitan areas was up slightly in May over its April level for the first time since 2006.

Now this is the same news as yesterday, but I just want to point out the widespread reporting of a possible bottom in housing prices. And because of the way Case-Shiller is constructed (with a three month moving average) there is a good chance prices will look positive for the June report too (to be released in August).

These are influential writers.

Streitfeld has been writing about the housing bubble and collapse for years. The Atlantic named him "The Bard of the Bubble" in 2006.

Hong has only been covering housing for a couple of years, but he has also done a very good job.

Of course I think house prices will continue to decline in the Fall, and that the May report was distorted by seasonal factors.

by Calculated Risk on 7/28/2009 10:45:00 PM

From the NY Times: Feds Push Mortgage Companies to Modify More Loans

The Obama administration, scrambling to get its main housing initiative on track, extracted a pledge from 25 mortgage company executives to improve their efforts to assist borrowers in danger of foreclosure.

In an all-day series of meetings Tuesday at the Treasury Department, government officials reached a verbal agreement with the executives for a new goal of about 500,000 loan modifications by Nov. 1 and stressed the program's urgency.

The sessions came amid concerns that the Obama administration will fall far short of its original goal of helping up to 3 million to 4 million troubled borrowers with modified loans.

As of this week, only about 200,000 borrowers were enrolled in three-month trial loan modifications ...

A "verbal agreement"?

Counting the number of mods might make for useful PR, but some mods are more effective than others. A capitalization of missed payments and fees, along with a rate reduction and/or extended term, are the most common modifications. But for homeowners with significant negative equity that is just "extend and pretend" and leads to a high redefault rate and just postpones foreclosure.

by Calculated Risk on 7/28/2009 07:30:00 PM

Nick Timiraos at the WSJ writes: Study Finds Underwater Borrowers Drowned Themselves with Refinancings (ht Jack)

Why are so many homeowners underwater on their mortgages?
...
Michael LaCour-Little, a finance professor at California State University at Fullerton, looked at 4,000 foreclosures in Southern California from 2006-08. He found that, at least in Southern California, borrowers who defaulted on their mortgages didn’t purchase their homes at the top of the market. Instead, the average acquisition was made in 2002 and many homes lost to foreclosure were bought in the 1990s. More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.

Here is the study: Follow the Money: A Close Look at Recent Southern California Foreclosures

The conventional wisdom is that households who purchased at the top of the market during the recent housing bubble are those most at risk of default due to recent price declines, upward re-sets of adjustable rate mortgage instruments, the economic downturn, and other factors. Here we use public record data to study Southern California borrowers facing foreclosure in late 2006 and 2007. We estimate property values at the time of the scheduled foreclosure sale with the automated valuation model of a major financial institution and then track actual sales prices for those properties that actually sold, either at auction or as later as REO. We find that virtually all of the borrowers had taken large amounts of equity out of the property through refinancing and/or junior lien borrowing with total cash extracted exceeding $300 million. As a result, losses to lenders exceed those of borrowers by a substantial margin, calling into question policies aimed at protecting borrowers.
emphasis added

It may seem unfair that these homeowners receive help from the bank (or from the government), but as far as slowing foreclosures it really doesn't matter why the homeowner is underwater. I think the research from the Boston Fed suggesting the costs of foreclosure are less than the costs of modifications is a stronger argument against many mods.

by Calculated Risk on 7/28/2009 05:43:00 PM

To preface this post, here are my notes from the April 2008 Milken conference:

Sam Zell started by saying we need to separate commercial from residential. Commercial will be fine in his view (not my view). Also Zell thinks losses are overstated for investment banks and CDOs.

Zell isn't talking about new construction (CRE), rather he is talking about prices for existing CRE. He feels there is too much global demand ("liquidity") for prices to fall too far - especially for Class-A buildings.

A little over a year later several Class-A owners are just walking away.

Now today, from CNBC: Real Estate Bottom Will Turn Around Economy: Zell

After posting three straight months of positive data, the residential real estate market has reached an equilibrium where prices will stop falling, said Sam Zell, founder and chairman of Equity Group Investments. This, in turn, will spark stabilization throughout the rest of the economy.

If single family housing starts and new home sales have found a bottom, then that will remove a key drag from the economy and employment. That is a positive. But I think Zell is wrong on house prices. I think the pace of declines will slow, but that there will be a long tail for real prices.

I could be wrong ... and I think different areas will bottom at different times, and some lower priced areas with heavy foreclosure activity might be at or near a bottom (same with some non-bubble areas). But in general, I think prices will fall further.